Bank hikes interest rates by 0.5% and warns there may be more to come

The Bank of England has pushed interest rates up to 5%, the highest it has been since 2008, ITV News' Joel Hills and Robert Peston explain the impact

The Bank had to act.

Inflation is running higher and stronger than it expected. Wages are growing at a pace that suggests pay and prices are feeding off each other.

The danger: that price rises sweep through the UK economy like wildfire through dry grass.

The result: an interest rate hike of 0.5%. The biggest rise since February, taking the cost of borrowing back to a level last seen in September 2008.

Seven members of the Monetary Policy Committee (MPC) voted for the increase. Two voted against, noting that one a third of the impact of the tightening to-date has yet been felt.

As for what happens next, the language is unchanged: “If there were to be evidence of more persistent [inflationary] pressures, then further tightening in monetary policy would be required.”

Annual wage growth of 7.6% in the private sector is not something the Bank of England is prepared to tolerate. In its view, pay settlements on that scale can only be financed if companies raise their prices.

The headline rate of inflation in May (8.7%) came in higher than the Bank forecast for the fourth month in a row. Each “miss” risks undermining public confidence that the Bank can restore price stability.

As headline inflation comes in higher than Bank of England forecasts for the fourth month in a row. Joel Hills explains the next steps the UK may have to take to put a lid on inflation

Higher interest rates are designed to help by weakening demand and reducing inflation.

They do this by squeezing households so they can’t spend as much and squeezing businesses so they cannot raise their prices. One of the objectives - although the Bank would never put is in such crude terms - is to raise unemployment, reduce the clamour for labour and with it the upward pressure on pay.

Higher interest rates will also cause huge difficulties for 2.4 million households that will refinance their mortgages over the next 18 months.

The minutes of the MPC’s meeting restate the expectation that inflation will “fall significantly further during the course of the year”.

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This is built on the assumption that energy bills will start to fall sharply from July onwards. Last month’s forecast that the headline rate will reach 5.1% by the end of the year still stands.

OFGEM’s price cap protected UK households from the full force of the spike in energy bills last year. They also mean the benefits of lower market prices take longer to be felt.

This is one reason that helps explain why the UK looks like a straggler when compared to other countries.

Many advanced economies have been hit by a wave of high inflation. In the US and across the Eurozone, interest rates are rising but, as it stands, the UK has the highest headline rate of inflation.

But the price cap isn’t the full story. The main inflationary pressure in the US has been a shortage of workers. The main inflationary pressure in Europe was sky-high food and energy prices.

In the UK we’ve had both problems. We’ve also had to contend with Brexit, as the former Governor of the Bank, Mark Carney, reminded us last week.

Not so long ago there was a hope that high inflation was “transitory” and would subside without the need to for interest rates to rise to painful levels.

In that sense, today marks the moment. The Bank’s belief in “immaculate disinflation”, in as much as it ever existed, has gone.

Bank Rate stands at 5%. Last month the Bank forecast a technical recession would be avoided. It looks like a recession will be needed to bring inflation back under control.